þ
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year
Ended September 30, 2016

OR

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from ____________________ to ____________________

Commission File Number:
000-51726

Magyar Bancorp,
Inc.

(Exact Name of Registrant
as Specified in its Charter)

Delaware

20-4154978

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

400 Somerset Street, New Brunswick, New Jersey

08901

(Address of Principal Executive Office)

(Zip Code)

(732) 342-7600

(Issuer’s Telephone
Number including area code)

Securities Registered
Pursuant to Section 12(b) of the Act:

Title of Class

Name of Each Exchange On Which Registered

Common Stock, par value $0.01 per share

The NASDAQ Stock Market, LLC

Securities Registered Pursuant
to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o
No þ

Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o
No þ

Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes þ
No o

Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

þ

(Do not check if a smaller reporting company)

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o
No þ

The aggregate value of
the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the Common Stock as of
March 31, 2016 was $25.9 million. As of December 15, 2016, there were 5,820,746 outstanding shares of the registrant’s Common
Stock, including 3,200,450 shares owned by Magyar Bancorp, MHC, the registrant’s mutual holding company.

DOCUMENTS INCORPORATED
BY REFERENCE

1. Proxy
Statement for the Annual Meeting of Stockholders to be held in February, 2017 (Part III)

We have included or incorporated
by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute
“forward-looking statements” within the meaning of the safe harbour provisions of the U.S. Private Securities Litigation
Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future
events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other
than historical information or statements of current condition and may relate to our future plans and objectives and results, as
well as statements about the objective and effectiveness of our risk management and liquidity policies, statements about trends
in or growth opportunities for our business, statements about our future status, and activities or reporting under U.S. banking
and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,”
“expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,”
“opportunity,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions. By identifying these
statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ,
possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important
factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements
include, among others, those discussed below and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form
10-K.

Magyar Bancorp, MHC

Magyar Bancorp, MHC is
the New Jersey-chartered mutual holding company of Magyar Bancorp, Inc. Magyar Bancorp, MHC’s only business is the ownership
of 54.0% of the issued shares of common stock of Magyar Bancorp, Inc. So long as Magyar Bancorp, MHC exists, it will be required
to own a majority of the voting stock of Magyar Bancorp, Inc. The executive office of Magyar Bancorp, MHC is located at 400 Somerset
Street, New Brunswick, New Jersey 08901, and its telephone number is (732) 342-7600. Magyar Bancorp, MHC is subject to regulation
and examination by the Board of Governors of the Federal Reserve System (“FRB”) and the New Jersey Department of Banking
and Insurance (“NJDBI”).

Magyar Bancorp, Inc.

Magyar Bancorp, Inc. is
the mid-tier stock holding company of Magyar Bank. Magyar Bancorp, Inc. is a Delaware-chartered corporation and owns 100% of the
outstanding shares of common stock of Magyar Bank. Magyar Bancorp, Inc. has not engaged in any significant business activity other
than owning all of the shares of common stock of Magyar Bank. At September 30, 2016, Magyar Bancorp, Inc. had consolidated assets
of $584.4 million, total deposits of $492.7 million and stockholders’ equity of $47.7 million. The executive offices of Magyar
Bancorp, Inc. are located at 400 Somerset Street, New Brunswick, New Jersey 08901, and its telephone number is (732) 342-7600.
Magyar Bancorp, Inc. is subject to comprehensive regulation and examination by the FRB and the NJDBI.

Magyar Bank

Magyar Bank is a New Jersey-chartered
savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association.
In 1954, Magyar Bank converted to a New Jersey savings and loan association, before converting to a New Jersey savings bank charter
in 1993. We conduct business from our main office located at 400 Somerset Street, New Brunswick, New Jersey, and our six branch
offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and North Edison, New Jersey. The
telephone number at our main office is (732) 342-7600.

General

Our principal business
consists of attracting retail deposits from the general public in the areas surrounding our main office in New Brunswick, New Jersey
and our branch offices located in Middlesex and Somerset Counties, New Jersey, and investing those deposits, together with funds
generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit,
commercial real estate loans, commercial business loans, Small Business Administration (“SBA”) loans, construction
loans and investment securities. We also originate consumer

loans, which consist primarily of secured demand loans. We originate
loans primarily for our loan portfolio. However, from time to time we have sold some of our long-term fixed-rate residential mortgage
loans into the secondary market, while retaining the servicing rights for such loans. Our revenues are derived principally from
interest on loans and securities, our investment securities consist primarily of mortgage-backed securities and U.S. Government
and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of
funds are deposits, borrowings and principal and interest payments on loans and securities. We are subject to comprehensive regulation
and examination by the NJDBI and the Federal Deposit Insurance Corporation (“FDIC”).

Market Area

We are headquartered in
New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters
branch and our branch offices located in Middlesex and Somerset Counties, New Jersey. Our primary lending market area is broader
than our deposit market area and includes all of New Jersey.

The economy of our primary
market area is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan
area. The median household income in Middlesex and Somerset county rank among the highest in the nation.

Competition

We face intense competition
within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions
including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and
services that we currently do not offer, such as trust services and private banking. According to the Federal Deposit Insurance
Corporation’s annual Summary of Deposit report, at June 30, 2016 our market share of deposits was 1.20% and 0.60%
in Middlesex and Somerset Counties, respectively. Our market share of deposits was 1.33% and 0.60%, respectively, at June 30, 2015.

Our competition for loans
and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional
competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary
focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community
bank.

Lending Activities

We originate residential
mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $173.2 million, or 37.8%
of our total loans at September 30, 2016. Historically, we have not originated a significant number of loans for the purpose of
reselling them in the secondary market. In the future, however, to help manage interest rate risk and to increase fee income, we
may increase our origination and sale of residential mortgage loans. No loans were held for sale at September 30, 2016. We also
originate commercial real estate, commercial business and construction loans. At September 30, 2016, these loans totaled $199.5
million, $38.9 million and $14.9 million, respectively. We also offer consumer loans, which consist primarily of home equity lines
of credit and stock-secured demand loans. At September 30, 2016, home equity lines of credit and stock-secured demand loans totaled
$22.0 million and $9.4 million, respectively.

Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated.

September 30,

2016

2015

2014

2013

2012

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

(Dollars in thousands)

One-to four-family residential

$

173,235

37.8%

$

169,781

40.1%

$

160,335

39.4%

$

152,977

38.3%

$

157,536

40.5%

Commercial real estate

199,510

43.6%

173,864

41.0%

169,449

41.6%

163,368

40.9%

148,806

38.3%

Construction

14,939

3.3%

6,679

1.6%

12,232

3.0%

16,749

4.2%

17,952

4.6%

Home equity lines of credit

21,967

4.8%

21,176

5.0%

19,366

4.8%

20,349

5.1%

23,435

6.0%

Commercial business

38,865

8.5%

41,485

9.8%

35,035

8.6%

34,492

8.6%

29,930

7.7%

Other

9,355

2.0%

10,305

2.5%

10,396

2.6%

11,631

2.9%

11,265

2.9%

Total loans receivable

$

457,871

100.0%

$

423,290

100.0%

$

406,813

100.0%

$

399,566

100.0%

$

388,924

100.0%

Net deferred loan costs

216

192

217

247

204

Allowance for loan losses

(3,056

)

(2,886

)

(2,835

)

(3,013

)

(3,858

)

Total loans receivable, net

$

455,031

$

420,596

$

404,195

$

396,800

$

385,270

Loan Portfolio Maturities
and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2016. Demand
loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

The following table sets
forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2016 that are contractually due after September
30, 2017.

Due After September 30, 2017

Fixed

Adjustable

Total

(In thousands)

One-to four-family residential

$

109,294

$

60,911

$

170,205

Commercial real estate

8,866

173,121

181,987

Construction

1,700

840

2,540

Home equity lines of credit

1,706

14,643

16,349

Commercial business

3,704

9,702

13,406

Other

47

9,088

9,135

Total

$

125,317

$

268,305

$

393,622

Residential
Mortgage Loans. We originate residential mortgage loans, most of which are secured by properties located in our primary
market area and most of which we hold in portfolio. At September 30, 2016, $173.2 million, or 37.8% of our total loan portfolio,
consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained
from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from local
builders, real estate brokers and attorneys, and are underwritten pursuant to Magyar Bank’s policies and standards. Generally,
residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property,
with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential
mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of
Directors. Mortgage loans have been primarily originated for terms of up to 30 years. Magyar Bank has not participated in “sub-prime”
(mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage lending.
At September 30, 2016, non-performing residential mortgage loans totaled $2.5 million, or 1.4% of the total residential loan portfolio.
Interest income of $103,000 would have been recorded on non-performing residential mortgage loans for the year ended September
30, 2016, if they had been current in accordance with their original terms. During the year ended September 30, 2016, $134,000
was charged-off against the allowance for loan loss for three impaired residential real estate loans.

We also originate
home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include
a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations,
the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second
mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally
offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years.

Generally, all fixed-rate
residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines,
policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in
the secondary market. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage
interest rate risk and to increase fee income. However, there were no fixed-rate mortgage loans sold to Freddie Mac during the
year ended September 30, 2016. No loans were held for sale at September 30, 2016.

We generally do
not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance.
However, during the year ended September 30, 2016, we purchased $3.3 million of one-to four-family residential mortgage loans and
$6.1 million of commercial real estate loans.

At September 30,
2016, we had $114.6 million of fixed-rate residential mortgage loans, which represented 64.4% of our total residential mortgage
loan portfolio. At September 30, 2016, our largest fixed-rate residential mortgage loan was $2.6 million. The loan was performing
in accordance with its terms at September 30, 2016.

We also offer adjustable-rate
residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the London Interbank Offering
Rate (“LIBOR”) adjusted to a constant maturity of one year, which

adjusts either annually from the outset of the loan
or which adjusts annually after a one-, three-, five-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate mortgage
loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless
of the initial rate. We also offer adjustable-rate mortgage loans with an interest rate based on the prime rate as published in
The Wall Street Journal or the Federal Home Loan Bank of New York advance rates.

Adjustable-rate
mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans
have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential
for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher
interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate
mortgage loans during periods of rapidly rising interest rates.

At September 30,
2016, adjustable-rate residential mortgage loans totaled $61.6 million, or 35.6% of our total residential mortgage loan portfolio.
Of these loans, $8.6 million were interest-only loans originated with an average loan-to-value ratio of 69.4%. Interest-only loans
allow the borrower to make interest–only payments during an initial fixed-rate period. Following the initial period, the
borrower is required to make principal and interest payments. At September 30, 2016, our largest adjustable-rate residential mortgage
loan was for $3.0 million. The loan was performing in accordance with its terms at September 30, 2016.

In an effort to
provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans
are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties.
All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Federal Home Loan
Mortgage Corporation (“Freddie Mac”). These loans are originated with maximum loan-to-value ratios of 95%.

All residential
mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due
and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required
to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans.

Commercial
Real Estate Loans. As part of our strategy to add to and diversify our loan portfolio, we have continued our focus on increasing
our originations of commercial real estate loans. At September 30, 2016, $199.5 million, or 43.6%, of our total loan portfolio
consisted of these types of loans. Commercial real estate loans are generally secured by five-or-more-unit apartment buildings,
industrial properties and properties used for business purposes such as small office buildings and retail facilities primarily
located in our market area. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years
with adjustable rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based
on the appraised value of the property.

We consider a number
of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications
and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the
value and condition of the mortgaged property securing the loan. When evaluating the business qualifications of the borrower, we
consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the
borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider
the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised
value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure
it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals.
Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees
by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance.

Loans secured by
commercial real estate generally are larger than residential mortgage loans and involve greater credit risk. Commercial real estate
loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to
a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on
such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.
Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

The maximum amount
of a commercial real estate loan is limited by our Board-established loans-to-one-borrower limit, which is currently 15% of Magyar
Bank’s capital, or $7.6 million. At September 30, 2016, our largest commercial real estate loan was $5.7 million and was
secured by four office buildings located in Parsippany, New Jersey. The loan was performing in accordance with its terms at September
30, 2016. At September 30, 2016, three commercial real estate loans totaling $443,000 were non-performing. During the year ended
September 30, 2016, $61,000 was charged-off against the allowance for loan loss for two commercial real estate loans and $100,000
was recovered from a prior year charge-off. Interest income of $22,000 would have been recorded on non-performing commercial real
estate loans for the year ended September 30, 2016, if they had been current in accordance with their original terms. All other
loans secured by commercial real estate were performing in accordance with their terms.

Construction
Loans. We also originate construction loans for the development of one-to four-family homes, apartment buildings and commercial
properties. Historically we also originated construction loans for the development of town homes and condominiums. Construction
loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction
of their personal residences. At September 30, 2016, our construction loans totaled $14.9 million, or 3.3% of total loans.

At September 30,
2016, construction loans for the development of one-to four-family residential properties totaled $4.3 million. These construction
loans generally have a maximum term of 24 months. We provide financing for land acquisition, site improvement and construction
of individual homes. Land acquisition loans are limited to 50% to 75% of the sale price of the land. Site improvement loans are
limited to 100% of the bonded site improvement costs. Construction loans are limited to 75% of the lesser of the contract sale
price or appraised value of the property (less funds already advanced for land acquisition and site improvement).

At September 30,
2016, construction loans for the development of town homes, condominiums and apartment buildings totaled $2.8 million. The maximum
loan-to-value ratio limit applicable to these loans has been 70% of the appraised value of the property. Finally, we may retain
up to 10% of each loan advance until the property attains a 90% occupancy level.

At September 30,
2016, construction loans for the development of commercial properties totaled $7.8 million. These construction loans have a maximum
term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property.

The maximum amount of a
construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $7.6
million. At September 30, 2016, our largest outstanding construction loan was a $1.9 million loan to finance the construction of
a commercial office building located in New Jersey. The loan was performing in accordance with its terms at September 30, 2016.
At September 30, 2016, there were no non-performing construction loans. During the year ended September 30, 2016, there were no
loans charged-off against the allowance for loan loss while $7,000 was recovered from a prior year charge-off.

Before making a
commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally
also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction
loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee
from each principal of all of our construction loan borrowers.

Construction lending
is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion
of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction
cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of
the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed
the value of the collateral.

Commercial
Business Loans. At September 30, 2016, our commercial business loans totaled $38.9 million, or 8.5% of total loans. We
make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized
businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business
loan is 25 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture.
Commercial business loans are made with either

adjustable or fixed rates of interest. The interest rates for adjustable commercial
business loans are typically based on the prime rate as published in The Wall Street Journal.

Included in commercial
business loans are SBA 7(a) loans, on which the SBA provides guarantees of up to 70 percent of the principal balance (85% for loans
under $150,000). These loans are made for the purposes of providing working capital and financing the purchase of equipment, inventory
or commercial real estate, and may be made inside or outside the Company’s market place. Generally, an SBA 7(a) loan has
a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why
the government provides the guarantee. The deficiency may be a higher loan to value ratio, lower debt service coverage ratio or
weak personal financial guarantees. In addition, many SBA 7(a) loans are for start-up businesses where there is no history of financial
information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work
with the Bank on a single transaction. The guaranteed portions of the Company’s SBA loans are generally sold in the secondary
market.

When making commercial
business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally
are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable
securities. In addition, we generally require the business principals to execute personal guarantees.

Commercial business
loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are
made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by
real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability
to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans
may depend substantially on the success of the borrower’s business. Further, any collateral securing commercial business
loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through
our underwriting standards.

The maximum amount
of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $7.6
million currently. At September 30, 2016, our largest commercial business loan was a $5.0 million loan to a company that provides
janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its terms
at September 30, 2016. At September 30, 2016, one commercial business loan totaling $997,000 was non-performing. Interest income
of $88,000 would have been recorded on non-performing commercial business loans for the year ended September 30, 2016, if they
had been current in accordance with their original terms. During the year ended September 30, 2016, $1.1 million was charged-off
against the allowance for loan loss for seven impaired commercial business loans and $26,000 was recovered from a prior year charge-off.

Home Equity
Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area.
At September 30, 2016, these loans totaled $22.0 million, or 4.8% of our total loan portfolio. The underwriting standards we use
for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s
ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan.
The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity
lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal, with
terms of up to 25 years.

The maximum amount
of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital,
or $7.6 million currently. At September 30, 2016, our largest home equity line of credit loan was $2.0 million. The loan was performing
according to its terms at September 30, 2016. At September 30, 2016, all home equity lines of credit were performing in accordance
with their terms with the exception of three non-performing loans totaling $281,000. Interest income of $5,000 would have been
recorded on non-performing home equity lines of credit for the year ended September 30, 2016, if they had been current in accordance
with their original terms. During the year ended September 30, 2016, $98,000 was charged-off against the allowance for loan loss
for two impaired home equity lines of credit and $82,000 was recovered from a prior year charge-off.

We also originate
loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange
or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered
for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street
Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time.

At September 30,
2016, stock-secured loans totaled $8.8 million, or 1.94% of our total net loan portfolio. Generally, we limit the aggregate amount
of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital, with the exception of Johnson
& Johnson, for which the collateral concentration limit is 150% of Magyar Bank’s capital. At September 30, 2016, $8.7
million, or 1.92% of our loan portfolio, was secured by the common stock of Johnson & Johnson, a New York Stock Exchange company
that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are
underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this
stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral
securing these loans. As of September 30, 2016, the aggregate loan-to-value ratio of the stock-secured portfolio was 30.5%.

Loan Originations,
Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating
at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We
originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon
the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.

Generally, we retain
in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans
for the purpose of reselling them in the secondary market. In the future, however, to help manage our interest rate risk and to
increase fee income, we may increase our origination and sale of fixed-rate residential loans and commercial business loans guaranteed
by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights
retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans
were held for sale at September 30, 2016.

At September 30,
2016, we were servicing SBA guaranteed and commercial participation loans sold in the amount of $20.3 million and $8.1 million,
respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance
and tax payments on behalf of the borrowers and generally administering the loans.

From time-to-time,
we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite
our participation portion of the loan according to our own underwriting criteria and procedures. At September 30, 2016, we had
$9.1 million of loan participation interests in which we were the lead lender, and $14.1 million in loan participations in which
we were not the lead lender. We have entered into certain loan participations when the aggregate outstanding balance of a particular
customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere
to our loan policies. At September 30, 2016, all participation loans were performing in accordance with their terms.

During the fiscal
year ended September 30, 2016, we originated $45.0 million of fixed-rate and adjustable-rate commercial real estate loans and $35.3
million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans. The fixed-rate loans are primarily of
loans with terms of 30 years or less. We also originated $6.5 million of construction loans, $3.1 million of commercial business
loans, and $2.8 million of home equity lines of credit and other loans during the fiscal year ended September 30, 2016.

We generally do
not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders
program. At September 30, 2016, we had $7.1 million of one-to four-family residential mortgage loans that were purchased from other
lenders, and $2.9 million were purchased in the fiscal year ended September 30, 2016.

We commence collection
efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices
are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted
early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our
collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated
or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure
the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed
on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.

A summary report
of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis. If no repayment plan is in process,
the file is referred to counsel for the commencement of foreclosure or other collection efforts.

Non-Performing
Assets. The table on the following page sets forth the amounts and categories of our non-performing assets at the dates
indicated. The table includes troubled debt restructurings (loans for which a portion of interest or principal has been forgiven
and loans modified at interest rates materially less than current market rates) for each date presented.

At September 30, 2016,
our portfolio of commercial business, commercial real estate and construction loans totaled $253.3 million, or 55.3% of our total
loans, compared to $222.0 million, or 52.5% of our total loans, at September 30, 2015. Commercial business, commercial real estate
and construction loans generally have more risk than one-to four-family residential mortgage loans. As shown in the table above,
our troubled debt restructurings and total non-performing assets decreased $6.5 million to $16.3 million at September 30, 2016
from $22.8 million at September 30, 2015, and decreased $11.0 million from $27.3 million at September 30, 2014.

Additional interest income
of approximately $217,000 and $356,000 would have been recorded during the fiscal years ended September 30, 2016 and 2015, respectively,
if the non-accrual loans summarized in the above table had performed in accordance with their original terms.

The Company accounts for
its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment
based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as
a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of
disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless
of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines
that foreclosure is probable.

The Company records cash
receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges
unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company continues to recognize interest income
on impaired loans that are performing.

Troubled debt restructurings
(“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants
a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of
a loan, or a combination of both. There were no TDR loans during the fiscal year ended September 30, 2016.

Delinquent Loans.
The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans
delinquent more than three months are generally classified as non-accrual loans.

Real Estate Owned.
Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”)
until sold. When property is acquired it is recorded at fair value less estimated cost to sell at the date of foreclosure, establishing
a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition.

The Company held $12.1
million of OREO properties at September 30, 2016, a decrease of $4.1 million from $16.2 million at September 30, 2015. During the
year ended September 30, 2016, the Company was able to successfully dispose of twenty properties with an aggregate carrying value
of $4.7 million for a net loss of $101,000 and the Company was able to secure the title for four other properties totaling $1.8
million.

OREO at September 30, 2016
consisted of eighteen residential properties (twelve of which were leased), seven real estate properties approved for the construction
of residential homes, and five commercial real estate buildings. The Bank is determining the proper course of action for its OREO
properties, which may include holding the properties until the real estate market improves, selling the properties to a developer
or completing partially completed homes for either rental or sale.

The Company also recorded
$301,000 in valuation allowances against five properties during the year ended September 30, 2016 based on either updated appraisals
or contracts of sale. Further declines in real estate values may result in a charge to expense in the future. Routine holding costs
are charged to expense as incurred and improvements to OREO that enhance the value of the real estate are capitalized.

Classified
Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,”
“doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets
include those characterized by the “distinct possibility” we will sustain “some loss” if the deficiencies
are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,”
with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of
currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss”
are those considered “un-collectible” and of such little value their continuance as assets without the establishment
of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential
weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if
the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment
of the asset. On the basis of our review of assets at September 30, 2016, classified loans consisted of $209,000 of special mention
assets, $8.7 million of substandard assets and $997,000 of doubtful assets.

We are required
to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful,
as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent
losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem
assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when,
based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established.
For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for
loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review
by the NJDBI and the FDIC, which can direct us to establish additional loss allowances.

The loan portfolio is reviewed
on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified
assets constitute non-performing assets.

Allowance for
Loan Losses

Our allowance for
loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable.
Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably
estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions.
The allowance for loan losses as of September 30, 2016 was maintained at a level that represents management’s best estimate
of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective,
as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe
we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic
or other conditions in the future differ from the current environment.

In addition, as
an integral part of their examination process, the NJDBI and the FDIC will periodically review our allowance for loan losses.
Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them
at the time of their examination.

Allocation of Allowance
for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of
the allowance to the total allowance and the percent of loans in each category to total loans at the dates indicated. The allowance
for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not
restrict the use of the allowance to absorb losses in other categories.

Our Board of Directors
has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy
is reviewed annually by the Board of Directors and changes to the policy are subject to approval by our Board of Directors. While
general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily
with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included
in the Investment Policy are followed and only prudent securities are considered for investment. They are authorized to execute
transactions that fall within the scope of the established Investment Policy up to $2.5 million per transaction individually or
$5.0 million per transaction jointly. Investment transactions in excess of $5.0 million must be approved by the Asset and Liability
Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings.

Our investments
portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises,
including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions,
overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal securities. In addition,
we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital.

The Investment Policy
requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a
thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management
objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and
appreciation.

At September 30,
2016, our securities portfolio totaled $58.2 million, or 10.0% of our total assets. Securities are classified as held-to-maturity
or available-for-sale when purchased. At September 30, 2016, $52.9 million of our securities were classified as held-to-maturity
and reported at amortized cost, and $5.2 million were classified as available-for-sale and reported at fair value. At September
30, 2016, we held no investment securities classified as held-for-trading.

U.S. Government
Agency and Government-Sponsored Enterprise Obligations. At September 30, 2016, our U.S. Government Agency and Government-Sponsored
Enterprise Obligations totaled $54.6 million, or 93.8% of our total securities portfolio. Of this amount, $50.6 million were mortgage-backed
securities and $4.0 million were debt securities. While these securities generally provide lower yields than other securities in
our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain
deposits or borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense,
and to lower our credit risk as a result of the guarantees provided by these issuers.

Mortgage-Backed
Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities
insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities
issued or sponsored by private issuers. At September 30, 2016, our mortgage-backed securities, including CMOs, totaled $51.2 million,
or 88.0% of our total securities portfolio. Included in this balance was $600,000 of mortgage-backed securities issued by private
issuers. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A”
or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly
greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities.

Mortgage-backed
pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate
on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family
or multi-family mortgages. As loan payments are made by the borrowers, the principal and interest portion of the payment is passed
through to the investor as received. CMOs are also backed by mortgages. However they differ from mortgage-backed pass through securities
because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders
of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends
on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages.
Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed
securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be
used to collateralize borrowings and other liabilities.

Mortgage-backed
securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any discount relating

to such instruments that can change
the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the
securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in
interest rates.

Our mortgage-backed
securities portfolio had a weighted average yield of 2.58% at September 30, 2016. The estimated fair value of our mortgage-backed
securities portfolio at September 30, 2016 was $52.3 million, which was $1.2 million more than the amortized cost of $51.1 million.
Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.

Corporate
and Other Securities. At September 30, 2016, the Bank held one corporate note totaling $3.0 million issued by Wells Fargo
Bank. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in
one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment
portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer.

Equity Securities.
At September 30, 2016, we held no equity securities other than $2.2 million in Federal Home Loan Bank of New York stock. The investment
in Federal Home Loan Bank of New York stock is classified as a restricted security, carried at cost and evaluated for impairment.
Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations.
Such investments other than the Federal Home Loan Bank of New York are carried at their fair value and fluctuations in the fair
value of such investments, including temporary declines in value, directly affect our net capital position.

Securities Portfolios.
The following tables set forth the composition of our securities portfolio (excluding Federal Home Loan Bank of New York
common stock) at the dates indicated.

At September 30, 2016

At September 30, 2015

At September 30, 2014

Gross

Gross

Gross

Gross

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Securities available for sale:

(In thousands)

Obligations of U.S. government agencies:

Mortgage backed securities-residential

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

1,294

$

1

$

—

$

1,295

Obligations of U.S. government-sponsored enterprises:

Mortgage-backed securities-residential

5,075

52

—

5,127

5,839

82

(7

)

5,914

10,485

39

(155

)

10,369

Private label mortgage-backed securities-residential

108

—

(1

)

107

151

—

(1

)

150

404

3

(1

)

406

Total securities available for sale

$

5,183

$

52

$

(1

)

$

5,234

$

5,990

$

82

$

(8

)

$

6,064

$

12,183

$

43

$

(156

)

$

12,070

At September 30, 2016

At September 30, 2015

At September 30, 2014

Gross

Gross

Gross

Gross

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Securities held to maturity:

(In thousands)

Obligations of U.S. government agencies:

Mortgage backed securities-residential

$

4,383

$

171

$

(90

)

$

4,464

$

5,414

$

156

$

(99

)

$

5,471

$

7,308

$

223

$

(139

)

$

7,392

Mortgage backed securities-commercial

1,034

—

(1

)

1,033

1,101

—

(2

)

1,099

1,168

—

—

1,168

Obligations of U.S. government-sponsored enterprises:

Mortgage backed securities-residential

40,024

1,098

(16

)

41,106

37,563

647

(67

)

38,143

36,894

413

(507

)

36,800

Debt securities

4,000

1

—

4,001

5,000

2

(25

)

4,977

3,000

—

(152

)

2,848

Private label mortgage-backed securities-residential

493

—

(6

)

487

536

1

(1

)

536

593

25

(4

)

614

Corporate securities

3,000

—

(242

)

2,758

3,000

22

—

3,022

—

—

—

—

Total securities held to maturity

$

52,934

$

1,270

$

(355

)

$

53,849

$

52,614

$

828

$

(194

)

$

53,248

$

48,963

$

661

$

(802

)

$

48,822

At September 30, 2016,
a total of nine securities with an aggregate fair value of $8.5 million had gross unrealized losses of $356,000, or approximately
4.2% of fair value. None of these unrealized losses were considered other-than-temporary.

Portfolio Maturities
and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the
mortgage-backed securities portfolio at September 30, 2016 are summarized in the following tables. Maturities are based on the
final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

General. Deposits,
including certificates of deposit, demand, savings, NOW and money market accounts, have traditionally been the primary source of
funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and
to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement
cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional
sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities,
income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively
stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions
and levels of competition.

Deposits.
Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including
demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit
account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain
on deposit and the interest rate. We also accept brokered deposits when attractive rates and terms are available. At September
30, 2016, we had $13.9 million in brokered deposits as compared to $11.5 million at September 30, 2015.

Interest rates,
maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized
customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain
deposits.

The flow of deposits
is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition.
The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand.
Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits,
and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At September
30, 2016, $134.0 million, or 27.2% of our deposit accounts, were certificates of deposit (including individual retirement accounts).

The following table sets
forth the distribution of total deposit accounts, by account type, at the dates indicated.

September 30,

2016

2015

2014

Weighted

Weighted

Weighted

Average

Average

Average

Deposit Type

Balance

Percent

Rate

Balance

Percent

Rate

Balance

Percent

Rate

(Dollars in thousands)

Demand accounts

$

94,462

19.17

%

0.00

%

$

87,915

18.86

%

0.00

%

$

84,306

18.80

%

0.00

%

Savings accounts

100,706

20.44

%

0.72

%

90,196

19.34

%

0.69

%

65,123

14.52

%

0.47

%

NOW accounts

49,045

9.96

%

0.20

%

41,457

8.89

%

0.17

%

47,029

10.49

%

0.14

%

Money market accounts

114,458

23.23

%

0.41

%

103,593

22.22

%

0.36

%

102,118

22.77

%

0.29

%

Certificates of deposit

114,355

23.21

%

1.16

%

122,088

26.18

%

0.99

%

126,661

28.24

%

1.02

%

Retirement accounts

19,624

3.98

%

1.19

%

21,020

4.51

%

1.20

%

23,214

5.18

%

1.18

%

Total deposits

$

492,650

100.00

%

0.58

%

$

466,269

100.00

%

0.54

%

$

448,451

100.00

%

0.50

%

As of September 30, 2016,
the aggregate amount of outstanding certificates of deposit (including retirement accounts) in amounts greater than or equal to
$100,000 was $91.8 million. The following table sets forth the maturity of these certificates as of September 30, 2016 (in thousands):

Three months or less

$

10,528

Over three months through six months

9,690

Over six months through one year

14,686

Over one year to three years

45,076

Over three years

11,840

Total

$

91,820

At September 30, 2016,
$56.5 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based
on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.

The following table sets
forth the interest-bearing deposit activities for the periods indicated.

September 30,

2016

2015

2014

(Dollars in thousands)

Beginning balance

$

378,354

$

364,145

$

354,983

Net deposits before interest credited

17,233

11,884

6,928

Interest credited

2,601

2,325

2,234

Ending balance

$

398,188

$

378,354

$

364,145

Borrowings.
Our borrowings consist of short- and long-term advances from the Federal Home Loan Bank of New York.

As of September 30, 2016,
we had long term advances from the Federal Home Loan Bank in the amount of $36.0 million. These aggregate borrowings represent
6.7% of total liabilities and had a weighted average rate of 2.12% at September 30, 2016. Based on eligible collateral pledged
to the Federal Home Loan Bank of New York at September 30, 2016, we had an aggregate borrowing capacity of $95.1 million with the
Federal Home Loan Bank.

Repurchase agreements are
recorded as financing transactions as we maintain effective control over the transferred or pledged securities. The dollar amount
of the securities underlying the agreements continues to be carried in our securities portfolio while the obligations to repurchase
the securities are reported as liabilities in our Consolidated Balance Sheets. The securities underlying the agreements are delivered
to the party with whom each transaction is executed. Those parties agree to resell to us the identical securities we delivered
to them at the maturity or call period of the agreement.

Long-term Federal Home
Loan Bank of New York advances as of September 30, 2016 mature as follows (in thousands):

Year Ending September 30,

2017

$

5,000

2018

5,100

2019

8,940

2020

10,294

2021

2,500

Thereafter

4,206

$

36,040

Information concerning
overnight line of credit advances with the Federal Home Loan Bank of New York is summarized as follows:

September 30,

2016

2015

(Dollars in thousands)

Balance at end of year

$

—

$

—

Weighted average balance during the year

$

1,080

$

2,958

Maximum month-end balance during the year

$

16,200

$

18,500

Average interest rate during the year

0.56%

0.37%

Subsidiary Activities

Magyar Bank organized
Magbank Investment Company on August 15, 2006 as a New Jersey investment corporation subsidiary for the purpose of buying, selling
and holding investment securities. The income earned on Magbank Investment Company’s investment securities is subject to
a significantly lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank.

Hungaria Urban Renewal,
LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring
and developing Magyar Bank’s main office. On January 24, 2006, Magyar Bank exercised a purchase option within its lease from
Hungaria Urban Renewal, LLC allowing Magyar Bank to purchase the land and building from this entity. Magyar Bank acquired a 100%
interest in Hungaria Urban Renewal, LLC, which will have no other business other than owning Magyar Bank’s main office site.
As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban
Renewal, LLC’s name.

Magyar Service Corp., a
New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corp. offers Magyar Bank customers and others
a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable
annuities, and retirement planning for individual and commercial customers.

Personnel

At September 30,
2016 we employed 92 full-time employees and 11 part-time employees. Our employees are not represented by any collective bargaining
group. Management believes that we have good relations with our employees.

General.
Magyar Bancorp, Inc. and Magyar Bank are subject to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The most recent audit of Magyar Bank’s federal tax returns by the Internal Revenue
Service was for the period ended September 30, 2013. The audit did not result in any material adjustments to the Company’s
tax returns or the Company’s financial statements. The following discussion of federal taxation is intended only to summarize
certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp,
Inc. or Magyar Bank.

Method of
Accounting. For federal income tax purposes, Magyar Bancorp, Inc. reports its income and expenses on the accrual
method of accounting and uses a tax year ending September 30th for filing its federal and state income tax returns.

Bad Debt Reserves.
Historically, Magyar Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions
and related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996
Act”), that eliminated the use of the percentage of taxable income method for computing tax bad debt deductions for tax years
after 1995, and required recapture into taxable income over a six-year period all applicable excess bad debt reserves accumulated
after 1988.

Currently, Magyar
Bank uses the direct charge off method to account for bad debt deductions for income tax purposes.

Taxable Distributions
and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves)
were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests.

At September 30,
2016, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves
remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends
in excess of tax earnings and profits, or ceases to maintain a bank charter.

Alternative Minimum
Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base
of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”).
The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Generally,
AMT net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax
liabilities in future years. Magyar Bancorp, Inc. and Magyar Bank have been subject to the AMT in prior periods but have subsequently
used most of these credits against regular tax liabilities.

Net Operating Loss
Carryovers. At September 30, 2016, a financial institution was able to carry back net operating losses to the preceding
five taxable years and forward to the succeeding 20 taxable years. At September 30, 2016, the Company had approximately $3.6 million
of federal and $4.8 million of state net operating loss carry forwards available to offset future taxable income for tax reporting
purposes. The federal and state net operating loss carry forwards will begin to expire in 2029, if not used. Based on projections
of future taxable income, the Company expects to be able to utilize all net operating loss carry forwards prior to their expiration.

Corporate Dividends-Received
Deduction. Magyar Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Magyar
Bank as a wholly owned subsidiary. The corporate dividends-received deduction is 80% when the dividend is received from a corporation
having at least 20% of its stock owned by the recipient corporation. A 70% dividends-received deduction is available for dividends
received from corporations owned less than 20% by the recipient corporation.

State Taxation

New Jersey
State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income,
subject to certain adjustments, is subject to New Jersey tax. Magyar Bank, Magyar Service Corporation, and MagBank Investment Company
file New Jersey corporate income tax returns. Magyar Bank, Magyar Service Corp., and MagBank Investment Company are not currently
under audit with respect to their New Jersey income tax returns nor have their respective state tax returns been audited for the
past five years.

New Jersey tax law
does not and has not allowed for a taxpayer to file a tax return on a combined or consolidated basis with another member of the
affiliated group where there is common ownership. However, under recent tax legislation, if the taxpayer cannot demonstrate by
clear and convincing evidence that the tax filing discloses the true earnings of the taxpayer on its business carried on in the
State of New Jersey, the New Jersey Director of the Division of Taxation may, at the director’s discretion, require the taxpayer
to file a consolidated return of the entire operations of the affiliated group or controlled group, including its own operations
and income.

Delaware and
New Jersey State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp, Inc. is exempt
from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State
of Delaware.

Magyar Bancorp, Inc.
is subject to New Jersey corporate income taxes in the same manner as described above for Magyar Bank.

SUPERVISION AND REGULATION

General

Magyar Bank is a
New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance
Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the Commissioner of the
New Jersey Department of Banking and Insurance (the “Commissioner”) as the issuer of its charter, and by the FDIC as
deposit insurer and its primary federal regulator. Magyar Bank must file reports with the Commissioner and the FDIC concerning
its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such
as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and
the FDIC conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily
for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies
with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Magyar Bancorp,
Inc., as a bank holding company controlling Magyar Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”),
and the rules and regulations of the FRB under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New
Jersey Banking Act”), and to the regulations of the Commissioner under the New Jersey Banking Act applicable to bank holding
companies. Magyar Bank and Magyar Bancorp, Inc. are required to file reports with, and otherwise comply with the rules and regulations
of the FRB and the Commissioner. Magyar Bancorp, Inc. is required to file certain reports with, and otherwise comply with, the
rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in such
laws and regulations, whether by the Commissioner, the Federal Deposit Insurance Corporation, the Federal Reserve Board or through
legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp, Inc. and their operations and stockholders.

Certain of the laws and
regulations applicable to Magyar Bank and Magyar Bancorp, Inc. are summarized below. These summaries do not purport to be complete
and are qualified in their entirety by reference to such laws and regulations.

Federal Legislation

The Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) broadened the base for FDIC insurance assessments.
Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions
to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to
give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing
the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their
own candidates using a company’s proxy materials. The legislation also directed the FRB to promulgate rules prohibiting excessive
compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank
Act provided for originators of certain securitized loans to retain a percentage of the risk, directed the FRB to regulate pricing
of certain

debit card interchange fees, contained a number of reforms related to mortgage originations and authorized depository
institutions to pay interest on business checking accounts.

New Jersey Banking Regulation

Activity Powers.
Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may
invest in:

·

real estate mortgages;

·

consumer and commercial loans;

·

specific types of debt securities, including certain corporate debt securities and obligations
of federal, state and local governments and agencies;

·

certain types of corporate equity securities; and

·

certain other assets.

A savings bank may
also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the
New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate
amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval of the Commissioner. New
Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks
or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit
or privilege, prior approval by the Commissioner by regulation or by specific authorization is required. The exercise of these
lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation-Activity
Restrictions on State-Chartered Banks” below.

Loans-to-One-Borrower
Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit
to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital
funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements
of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations.

Dividends.
Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that
the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay
a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital
stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends
that may be paid by Magyar Bank. See “Federal Banking Regulation-Prompt Corrective Action” below.

Minimum Capital
Requirements. Regulations of the Commissioner impose on New Jersey-chartered depository institutions, including Magyar
Bank, minimum capital requirements similar to those imposed by the Federal Deposit Insurance Corporation on insured state banks.
See “Federal Banking Regulation-Capital Requirements.”

Examination and Enforcement.
The NJDBI may examine Magyar Bank whenever it deems an examination advisable. The NJDBI examines Magyar Bank at least every two
years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and
may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner
has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed.
The Commissioner also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as
insolvency or unsafe or unsound condition to transact business.

Federal Banking Regulation

Capital Requirements.
Federal regulations require FDIC insured depository institutions to meet several minimum capital standards: a common equity
Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets, and
a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result
of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain
requirements of the Dodd-Frank Act.

The capital standards
require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of
at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is
generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity
Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity
Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related
surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory
convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for
loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out
election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains
on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the
AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities).
Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the
amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance
sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor
assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for
asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities,
a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk
weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a
risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing
the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments
to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity
Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital
conservation buffer requirement began being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases
each year until fully implemented at 2.5% on January 1, 2019.

In assessing an
institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors
as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

At September 30, 2016,
Magyar Bank’s common equity Tier 1 capital to risk-based assets ratio was 11.45%, total capital to risk-based assets was
12.19%, and Tier 1 capital to total assets leverage ratio was 8.27%. The Bank has committed to the FDIC to maintain capital at
or above the well capitalized level.

Prompt Corrective
Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized
institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended
to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution
is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based
capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution
is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution
is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio
of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed
to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution
is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2.0%.

Undercapitalized
institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the
FDIC’s approval and dividend restrictions as well as other discretionary actions by the regulator.

The FDIC is required,
with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.”
For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than
2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition
or upon the occurrence of certain events, including:

insolvency, or when the assets of the bank are less than its liabilities to depositors and others;

·

substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;

·

existence of an unsafe or unsound condition to transact business;

·

likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations
in the normal course of business; and

·

insufficient capital, or the incurring or likely incurring of losses that will deplete substantially
all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.

Activity Restrictions
on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered
Federal Deposit Insurance Corporation-insured banks and their subsidiaries to those permissible for national banks and their subsidiaries,
unless such activities and investments are specifically exempted by law or consented to by the Federal Deposit Insurance Corporation.

Before making a
new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal
law or the FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity.
The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the
activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted
for national banks only through a “financial subsidiary” are subject to additional restrictions.

Federal law permits
a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through
a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is
well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company
other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total
assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The
bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and
potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its
own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings
banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal
law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries,
it has not yet determined to engage in such activities.

Federal Home
Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of eleven regional federal
home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board (“FHFB”). The federal
home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in
home mortgage lending. Magyar Bank, as a member of the Federal Home Loan Bank of New York, is required to purchase and hold shares
of capital stock in the Federal Home Loan Bank of New York in specified amounts.

As of September
30, 2016, Magyar Bank was in compliance with these requirements.

Enforcement.
The Federal Deposit Insurance Corporation has extensive enforcement authority over insured savings banks, including Magyar Bank.
This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders
and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.

Deposit Insurance.
Magyar Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit
accounts at Magyar Bank are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 for each
separately insured depositor.

The FDIC assesses insurance
premiums based on the category to which an institution is assigned. Under this assessment system, the FDIC evaluates the risk of
each financial institution based on its supervisory rating and certain financial ratios for purposes of assigning institutions
to a category. Assessments are based on the institution’s category, subject to specified adjustments, with institutions perceived
as less risky to the deposit insurance fund paying lower assessments.

Effective April 1, 2011,
the FDIC Board changed the assessment base from adjusted domestic deposits to a bank’s average consolidated total assets
minus average Tier 1 capital, as required by the Dodd-Frank Act. The FDIC lowered assessment rates to between 2.5 and 9 basis points
on the broader base for banks in the lowest risk category and 30 to 45 basis points for banks in the highest risk category. The
final rule eliminated the adjustment to the rate paid for secured liabilities, including Federal Home Loan Bank advances, since
these are now part of the new assessment base.

On April 26, 2016, the
FDIC Board adopted a rule in accordance with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires
large institutions (those greater than $10 billion in assets) to bear the burden of raising the Reserve Ratio from 1.15% to 1.35%.
The rule also amended small institution pricing for deposit insurance which was effective the quarter after the Reserve Ratio reaches
1.15%. The Reserve Ratio is the total of the Deposit Insurance Fund (“DIF”) divided by the total estimated insured
deposits of the industry. The Reserve Ratio reached 1.15% effective as of June 30, 2016, lowering
small institution assessment rates to between 1.5 and 16 basis points for banks in the lowest risk category and 3 to 30 basis points
for banks in the higher risk categories. Once the reserve ratio reaches 1.38%, small institutions will receive credits to offset
their contribution to raising the Reserve Ratio to 1.35%. The rule also eliminated the previous risk categories in favor of an
assessment schedule based on examination ratings and financial modeling.

The
deposit insurance assessment rates are in addition to the assessments for payments on the bonds issued in the late 1980s by the
Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The FICO payments
will continue until the FICO bonds mature in 2017 through 2019. Our expense for the assessment of deposit insurance and the FICO
payments was $720,000 for the year ended September 30, 2016 and $721,000 for the year ended September 30, 2015.

Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the Federal Deposit Insurance Corporation. The Association does not believe that it is taking
or is subject to any action, condition or violation that could lead to termination of its deposit insurance.

Transactions
with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited
by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the
Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository
institution such as Magyar Bancorp, Inc. and Magyar Bancorp, MHC. In general, loan transactions between an insured depository institution
and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured
depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus
for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate
with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction
must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates
must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable
to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements.

Prohibitions
Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements.
A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or
fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a competitor of the institution.

Community
Reinvestment Act and Fair Lending Laws. All FDIC insured institutions have a responsibility under the Community Reinvestment
Act (“CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income
neighbourhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution’s
record of compliance with the CRA. Among other things, the current CRA regulations replace the prior process-based assessment factors
with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular,
the current evaluation system focuses on three tests:

·

a lending test, to evaluate the institution’s record of making loans in its service areas;

·

an investment test, to evaluate the institution’s record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

·

a service test, to evaluate the institution’s delivery of services through its service channels.

An institution’s
failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received
an “outstanding” CRA rating in our most recently completed federal examination, which was conducted by the FDIC in
2013.

In addition, the Equal
Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act
could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.

Loans to a Bank’s
Insiders

Federal Regulation.
A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of
certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations
imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount
of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable
to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New
Jersey Banking Regulation—Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’
related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions,
loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by
the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s
unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of
that insider be approved in advance by a majority of the Board of Directors of the bank, with any interested directors not participating
in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests,
would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally,
such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent
than, those that are prevailing at the time for comparable transactions with other persons.

An exception is made for
extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other employees of the bank.

In addition, federal law
prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent
banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the
time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other
unfavourable features.

New Jersey Regulation.
Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors
and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to
the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal
law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is
deemed to be in compliance with such provisions of the New Jersey Banking Act.

Federal Reserve System

Federal Reserve Board regulations
require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW
and regular checking accounts). At September 30, 2016, Magyar Bank was in compliance with the Federal Reserve Board’s reserve
requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.”
Magyar Bank is deemed by the Federal Reserve Board to be generally sound and thus is eligible to obtain secondary credit from its
Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution.
Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal
funds target rate.

The USA PATRIOT Act

The USA PATRIOT Act gives
the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal
banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining
whether to approve a merger or

other acquisition application of a member institution. Accordingly, if we engage in a merger or
other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We
have established policies, procedures and systems designed to comply with these regulations.

Sarbanes-Oxley Act of
2002

The Sarbanes-Oxley Act
of 2002 (“SOX”) is a law that addresses, among other issues, corporate governance, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate information. As directed by Section 302(a) of Sarbanes-Oxley Act
of 2002, Magyar Bancorp, Inc.’s Chief Executive Officer and Chief Financial Officer each are required to certify that its
quarterly and annual reports do not contain any untrue statement of a material fact. The rules have several requirements, including
having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness
of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors
about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and
whether there have been significant changes in our internal controls or in other factors that could significantly affect internal
controls. Magyar Bancorp, Inc. has existing policies, procedures and systems designed to comply with these regulations, and is
further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.

Section 404(b) requires
independent auditors to report on management’s assessment of internal controls over financial reporting. The 2010 Dodd-Frank
Act provided an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75.0 million
in market capitalization. The inclusion of the exemption in the final reform legislation permanently exempted the auditor attestation
requirement and significantly reduced the compliance burdens of smaller reporting companies. Disclosure of management attestations
on internal control over financial reporting continues to be required for smaller reporting companies.

Holding Company Regulation

Federal Regulation.
Magyar Bancorp, Inc. is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and
periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board. Bank holding companies are
generally subject to consolidated capital requirements established by the FRB. The Dodd-Frank Act required the FRB to amend its
consolidated minimum capital requirements for bank holding companies to make them no less stringent than those applicable to insured
depository institutions themselves. However, legislation was enacted in December 2014 which required the FRB to amend its “Small
Bank Holding Company” exemption from consolidated holding company capital requirements to generally extend the applicability
of the exemption from $500 million to $1 billion in assets. Regulations doing so were effective May 15, 2015. Consequently, bank
holding companies of under $1 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless
the Federal Reserve determines otherwise in particular cases.

Regulations of the FRB
provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation
of implementing regulations. Under the prompt corrective action provisions of the Act, a bank holding company parent of an undercapitalized
subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized
bank. See “Federal Banking Regulation—Prompt Corrective Action.” If the undercapitalized bank fails to file an
acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent
of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval
of the FRB.

As a bank holding
company, Magyar Bancorp, Inc. is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the
assets of any bank or bank holding company. Prior FRB approval is required for Magyar Bancorp, Inc. to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition,
it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.

A bank holding company
is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove
such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate
any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. Such notice and approval
is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations
of the FRB, that has received a composite

“1” or “2” rating, as well as a “satisfactory” rating
for management, at its most recent bank holding company inspection by the FRB, and that is not the subject of any unresolved supervisory
issues.

In addition, a bank holding
company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in,
or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be permissible.
Some of the principal activities that the FRB has determined by regulation to be so closely related to banking as to be permissible
are:

making investments in corporations or projects designed primarily to promote community welfare;
and

·

acquiring a savings and loan association.

Bank holding companies
that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which
are financial in nature, including investment banking and insurance underwriting. Magyar Bancorp, Inc. has not elected to be a
financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial
holding company if:

·

each of its depository institution subsidiaries is “well capitalized;”

·

each of its depository institution subsidiaries is “well managed;”

·

each of its depository institution subsidiaries has at least a “satisfactory” Community
Reinvestment Act rating at its most recent examination; and

·

the bank holding company has filed a certification with the FRB stating that it elects to become
a financial holding company.

Under federal law, depository
institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law
would be applicable potentially to Magyar Bancorp, Inc. if it ever acquired as a separate subsidiary a depository institution in
addition to Magyar Bank.

It has been the policy
of many mutual holding companies to waive the receipt of dividends declared by its subsidiary. In connection with its approval
of the reorganization, however, the FRB required Magyar Bancorp, MHC to obtain prior FRB approval before it may waive any dividends.
As of the date hereof, FRB policy is to prohibit a mutual bank holding company from waiving the receipt of dividends from its holding
company or bank subsidiary, and management is not aware of any instance in which the FRB has given its approval for a mutual bank
holding company to waive dividends. It is not currently intended that Magyar Bancorp, MHC will waive dividends declared by Magyar
Bancorp, Inc. as long as Magyar Bancorp, MHC is regulated by the Federal Reserve Board.

Conversion of Magyar
Bancorp, MHC to Stock Form. Magyar Bancorp, MHC is permitted to convert from the mutual form of organization to the capital
stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new stock holding company may be formed as the successor to Magyar Bancorp, Inc. (the “New Holding Company”),
Magyar Bancorp, MHC’s corporate existence would end, and certain depositors of Magyar Bank would receive the right to subscribe
for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders
other than Magyar Bancorp, MHC (“Minority Stockholders”) would be converted into a number of shares of common stock
of the New Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in Magyar Bancorp, Inc. immediately before the Conversion Transaction,
subject to any adjustment required by regulation or regulatory policy. The total number of shares held by Minority Stockholders
after a Conversion Transaction also would be increased by any purchases by Minority Stockholders in the stock offering conducted
as part of the Conversion Transaction.

Any Conversion Transaction
would require the approval of a majority of the outstanding shares of Magyar Bancorp, Inc. common stock held by Minority Stockholders
and the approval of a majority of the eligible votes of depositors of Magyar Bank.

New Jersey
Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding
company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms
are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain
reports with the Commissioner and is subject to examination by the Commissioner.

Acquisition
of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar
Bancorp, Inc. without first obtaining approval of such acquisition of control by the Federal Reserve Board and the Commissioner.

Federal Securities
Laws. Magyar Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Magyar Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Securities Exchange Act of 1934.

The registration under
the Securities Act of 1933 of shares of the common stock sold in the stock offering did not cover the resale of the shares. Shares
of the common stock purchased by persons who are not affiliates of Magyar Bancorp, Inc. may be resold without registration. Shares
purchased by an affiliate of Magyar Bancorp, Inc. will be subject to the resale restrictions of Rule 144 under the Securities Act
of 1933. If Magyar Bancorp, Inc. meets the current public information requirements of Rule 144 under the Securities Act of 1933,
each affiliate of Magyar Bancorp, Inc. who complies with the other conditions of Rule 144, including those that require the affiliate’s
sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of
shares not to exceed, in any three month period, the greater of 1% of the outstanding shares of Magyar Bancorp, Inc., or the average
weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future by Magyar
Bancorp, Inc. to permit affiliates to have their shares registered for sale under the Securities Act of 1933.

ITEM 1A.

Risk Factors

Changes in Interest
Rates May Hurt our Profits and Asset Values.

Our earnings largely depend
on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference
between:

·

the interest income we earn on our interest-earning assets, such as loans and securities; and

·

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our
assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. While we have taken steps
to attempt to reduce our exposure to increases in interest rates, historically our liabilities generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over
time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest
paid on our liabilities. Likewise, in a period of falling interest rates, the interest expense paid on our liabilities may not
decrease as rapidly as the interest income received on our assets. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Management of Market Risk.”

In addition, changes in
interest rates can affect the average life of loans and mortgage-backed securities. A reduction in interest rates causes increased
prepayments of loans and mortgage-backed securities as borrowers tend to refinance their debt to reduce their borrowing costs.
This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates
that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease
loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.

Changes in interest
rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves
inversely with changes in interest rates. At September 30, 2016, the fair value of our total securities portfolio was $59.1 million.
The unrealized net gain on securities totaled $966,000 on a pre-tax basis at September 30, 2016.

We evaluate interest
rate sensitivity using models that estimate the change in Magyar Bank’s net interest income over a range of interest rate
scenarios. At September 30, 2016, in the event of an immediate 200 basis point increase in interest rates, the model projects that
we would experience a $365,000, or 2.09%, decrease in net interest income in the first year following the change in interest rates,
and a $576,000, or 3.36%, increase in net interest income in the second year following the change in interest rates. At September
30, 2016, in the event of an immediate 100 basis point decrease in interest rates, the model projects that we would experience
an $901,000, or 5.16%, decrease in net interest income in the first year following the change in interest rates, and a $1.5 million,
or 8.65%, decrease in net interest income in the second year following the change in interest rates.

At September 30,
2016, our available-for-sale securities portfolio totaled $5.2 million, which were all mortgage-backed securities. To the extent
interest rates increase and the value of our available-for-sale portfolio decreases, our stockholders’ equity will be adversely
affected.

Because We Intend
to Continue our Emphasis on the Origination of Commercial Business Loans and Commercial Real Estate Loans, Our Lending Risk Has
Increased in Recent Years and May Increase in Future Years.

At September 30,
2016, our portfolio of commercial business and commercial real estate loans totaled $238.4 million, or 52.1% of our total loans,
compared to $215.3 million, or 50.9% of our total loans at September 30, 2015 and $204.5 million, or 50.3% of our total loans at
September 30, 2014. It is our intent to continue to emphasize the origination of commercial business and commercial real estate
loans. Commercial business and commercial real estate loans generally have more risk than one-to four-family residential mortgage
loans. At September 30, 2016, our non-performing loans decreased to $4.2 million from $5.9 million at September 30, 2016. Because
the repayment of these loans depends on the successful management and operation of the borrower’s properties or related businesses,
repayment of these loans has been and may continue to be affected by adverse conditions in the real estate market or the local
economy. Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial business
and commercial real estate loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family
residential mortgage loan. Finally, if we foreclose on a commercial business or commercial real estate loan, our holding period
for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer
potential purchasers of the collateral. Because we plan to continue to emphasize the origination of these loans, it may be necessary
to increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase
to our allowance for loan losses would adversely affect our earnings.

A Worsening of
Economic Conditions Could Reduce Demand for Our Products and Services and/or Result in Increases in Our Level of Non-performing
Loans, Which Could Have an Adverse Effect on Our Results of Operations.

Unlike larger financial
institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in
New Jersey and the greater New York metropolitan area. Local economic conditions have a significant impact on our commercial real
estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing
these loans. Almost all of our loans are to borrowers located in or secured by collateral located in New Jersey and the New York
metropolitan area.

A deterioration in economic
conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial
condition, liquidity and results of operations:

·

demand for our products and services may decline;

·

loan delinquencies, problem assets and foreclosures may increase;

·

collateral for loans, especially real estate, may decline in value, in turn reducing customers’
future borrowing power, and reducing the value of assets and collateral associated with existing loans;

·

the value of our securities portfolio may decline; and

·

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments
to us.

Moreover, a significant
decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic
conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures,
while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business
borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

If Our Allowance
for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.

Our allowance for
loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could
materially decrease our net income. Our allowance for loan losses was 0.67% of total loans and 72.6% of total non-performing loans
at September 30, 2016. We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency
experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to
absorb losses in our loan portfolio as of September 30, 2016.

Bank regulators
periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities
will have a material adverse effect on our financial condition and results of operations.

Strong Competition
Within Our Market Area May Limit Our Growth and Profitability.

Competition in the
banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking
firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we,
have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we
do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do.
Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit
and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional
information see “Business of Magyar Bank-Competition.”

If We Declare
Dividends on Our Common Stock, Magyar Bancorp, MHC Will Be Prohibited from Waiving the Receipt of Dividends by Current Federal
Reserve Board Policy, Which May Result in Lower Dividends for All Other Stockholders.

The Board of Directors
of Magyar Bancorp, Inc. has the authority to declare dividends on its common stock, subject to statutory and regulatory requirements.
So long as Magyar Bancorp, MHC is regulated by the FRB, if Magyar Bancorp, Inc. pays dividends to its stockholders, it also will
be required to pay dividends to Magyar Bancorp, MHC, unless Magyar Bancorp, MHC is permitted by the FRB to waive the receipt of
dividends. The FRB’s current position is to not permit a mutual holding company to waive dividends declared by its subsidiary.
Accordingly, because dividends will be required to be paid to Magyar Bancorp, MHC along with all other stockholders, the amount
of dividends available for all other shareholders will be less than if Magyar Bancorp, MHC were permitted to waive the receipt
of dividends.

Magyar Bancorp,
MHC Exercises Voting Control Over Magyar Bancorp, Inc.; Public Stockholders Own a Minority Interest.

Magyar Bancorp, MHC owns
a majority of Magyar Bancorp, Inc.’s common stock and, through its Board of Directors, exercises voting control over the
outcome of all matters put to a vote of stock holders (including the election of directors), except for matters that require a
vote greater than a majority. Public stockholders own a minority of the outstanding shares of Magyar Bancorp, Inc.’s common
stock. The same directors and officers who manage Magyar Bancorp, Inc. and Magyar Bank also manage Magyar Bancorp, MHC. In addition,
regulatory restrictions applicable to Magyar Bancorp, MHC prohibit the sale of Magyar Bancorp, Inc. unless the mutual holding company
first undertakes a second-step conversion.

We Operate In A Highly
Regulated Environment and May Be Adversely Affected By Changes In Laws And Regulations.

Magyar Bank is subject
to extensive regulation, supervision and examination by the NJDBI, its chartering authority, and by the Federal Deposit Insurance
Corporation, which insures Magyar Bank’s deposits. As a bank holding company, Magyar Bancorp, Inc. is subject to regulation
and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which financial institutions
and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and
depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operations of financial institutions, the classification of assets by financial
institutions and the adequacy of financial institutions’ allowance for loan losses. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Magyar Bank and Magyar Bancorp,
Inc.

Magyar Bank’s operations
are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various
laws and judicial and administrative decisions that impose requirements and restrictions on operations. These laws, rules and regulations
are frequently changed by legislative and regulatory authorities. There can be no assurance that changes to existing laws, rules
and regulations, or any other new laws, rules or regulations, will not be adopted in the future, which could make compliance more
difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Non-compliance with the
USA PATRIOT Act, Bank Secrecy Act, or Other Laws and Regulations Could Result in Fines or Sanctions.

The USA PATRIOT and Bank
Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering
and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports
with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions
to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure
to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing
new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and
regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations,
these policies and procedures may not be effective in preventing violations of these laws and regulations.

System Failure or Breaches of Our Network
Security Could Subject Us to Increased Operating Costs as well as Litigation and Other Liabilities.

The computer systems
and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations
are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications
failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material
adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also
jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which
may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us.
Although we, with the help of third-party service providers, intend to continue to implement security technology and establish
operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer
capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the
algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security
measures could have a material adverse effect on our financial condition and results of operations.

It is possible that a significant
amount of time and money may be spent to rectify the harm caused by a breach or hack. While we have general liability insurance,
there are limitations on coverage as well as dollar amount. Furthermore, cyber incidents carry a greater risk of injury to our
reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer
laws may require reimbursement of customer loss.

The financial services
industry has experienced an increase in both the number and severity of reported cyber attacks aimed at gaining unauthorized access
to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions

We have established policies
and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed
if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems
from compromises or breaches.

We also rely on the integrity
and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants
involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to
protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.

Our customers are also
the target of cyber attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised
and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities
but they may not fully protect us from fraudulent financial losses.

The occurrence of a breach
of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of
customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial
liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

ITEM 1B.

Unresolved Staff Comments

Not required for smaller reporting
companies.

ITEM 2.

Properties

The following table provides
certain information with respect to our six banking offices as of September 30, 2016:

Leased or

Original Year

Year of

Location

Owned

Leased or Acquired

Lease Expiration

Main Office:

400 Somerset Street

Owned

2005

—

New Brunswick, New Jersey

Full - Service Branches:

582 Milltown Road

Leased

2002

2021

North Brunswick, New Jersey

3050 State Route 27

Owned

1969

—

Kendall Park, New Jersey

1000 Route 202 South

Leased

2006

2031

Branchburg, New Jersey

475 North Bridge Street

Leased

2010

2025

Bridgewater, New Jersey

1167 Inman Avenue

Leased

2011

2026

Edison, New Jersey

The net book value of our
premises, land and equipment was approximately $18.1 million at September 30, 2016.

In the ordinary course
of business, we are a party to various legal actions which are incidental to the operation of our business. Although the ultimate
outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in
the opinion of management, based upon information currently available to us, any resulting liability is believed to be immaterial
to our consolidated financial position, results of operations and cash flows.

(a) Our
shares of common stock are traded on the NASDAQ Global Market under the symbol “MGYR.” At September 30, 2016, Magyar
Bancorp, MHC owned 3,200,450 shares, or 54.0% of the issued shares of our common stock. The approximate number of holders of record
of Magyar Bancorp, Inc.’s common stock as of September 30, 2016 was 472. Certain shares of Magyar Bancorp, Inc. are held
in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known
or included in the foregoing number. The following tables present quarterly market information for Magyar Bancorp, Inc. common
stock for each quarter of the previous two fiscal years. Magyar Bancorp, Inc. began trading on the NASDAQ Global Market on January
24, 2006. The following information was provided by the NASDAQ Stock Market.

Fiscal Year Ended

Closing

Dividends

September 30, 2016

High

Low

Price

Declared

Quarter ended September 30, 2016

$

10.60

$

9.65

$

10.09

$

—

Quarter ended June 30, 2016

10.24

9.65

9.90

—

Quarter ended March 31, 2016

10.31

9.51

9.88

—

Quarter ended December 31, 2016

11.00

9.56

10.01

—

Fiscal Year Ended

Closing

Dividends

September 30, 2015

High

Low

Price

Declared

Quarter ended September 30, 2015

$

10.41

$

9.51

$

9.80

$

—

Quarter ended June 30, 2015

11.15

8.40

9.65

—

Quarter ended March 31, 2015

8.70

8.15

8.42

—

Quarter ended December 31, 2014

8.90

8.13

8.44

—

Dividend payments by Magyar
Bancorp, Inc. would be dependent primarily on dividends it receives from Magyar Bank, because Magyar Bancorp, Inc. has no source
of income other than dividends from Magyar Bank, earnings from the investment of proceeds from the sale of shares of common stock
retained by Magyar Bancorp, Inc., and interest payments with respect to Magyar Bancorp, Inc.’s loan to the Employee Stock
Ownership Plan. For more information on regulatory restrictions regarding the payment of dividends, see “Item 1- Business-
Supervision and Regulation- New Jersey Banking Regulation-Dividends.”

Other than its employee
stock ownership plan, Magyar Bancorp, Inc. does not have any equity compensation plans that were not approved by stockholders.
The following table sets forth information with respect to the Magyar Bancorp’s equity compensation plans.

The Company completed its
first stock repurchase program of 130,927 shares in November 2007 and announced in November 2007 a second repurchase program of
up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares, under which 81,000 shares had been repurchased
as of September 30, 2016 at an average price of $8.33.

There were no repurchases
of our common stock during the year ended September 30, 2016.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Magyar Bancorp, Inc. (the
“Company”) is a Delaware-chartered mid-tier stock holding company whose most significant business activity is ownership
of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities
and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans,
home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily
on our net interest income which is the difference between the interest we earn on our interest-earning assets and the interest
we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment,
the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities,
and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and
local economic and competitive conditions, government policies and actions of regulatory authorities.

During the year ended September
30, 2016, the Company’s total assets grew $33.8 million to $584.4 million. The increase was attributable to a $34.4 million,
or 8.2%, increase in net loans due to growth in commercial real estate, residential mortgage, construction and home equity line
of credit loans. Investment securities and other real estate owned decreased $510,000 and $4.1 million, respectively.

Total deposits increased
$26.4 million, or 5.7%, to $492.7 million during the year ended September 30, 2016 from $466.3 million at September 30, 2015, due
to increases of $10.9 million in money market accounts, $10.5 million in savings accounts, $6.5 million in demand accounts and
$7.6 million in NOW accounts. The increase was partially offset by decreases of $7.7 million in certificate deposit accounts and
$1.4 million in retirement accounts.

The Company reported net
income of $1.1 million for the year ended September 30, 2016. Net income increased $194,000, or 21.6%, compared with net income
of $897,000 for the year ended September 30, 2015. The increase in net income between the twelve month periods was attributable
to higher net interest and dividend income, which increased $678,000, and non-interest income, which increased $155,000 between
the annual periods. Provisions for loan loss for the twelve months ended September 30, 2016 increased $102,000 to $1.4 million,
while non-interest expenses increased $286,000 to $15.9 million from the prior year period. The Company was able to offset lower
yields on earning assets during the year with lower costing interest bearing liabilities.

Throughout 2017, we expect
to continue reducing non-performing assets, diversifying our balance sheet with higher concentrations in commercial real estate
and commercial business loans, and managing non-interest expenses in order to increase profitability of the Company.

Critical Accounting Policies

Critical accounting
policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions
or assessments. We consider the following to be our critical accounting policies.

Allowance
for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses
in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the
provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant
estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity
of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount
of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical
accounting policy by management.

As a substantial
amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and
discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans.
Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly
optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan
and the related allowance determined. The assumptions supporting such

appraisals and discounted cash flow valuations are carefully
reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs
a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations,
the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant
factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant
change based on changes in economic and real estate market conditions.

The evaluation has
a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired
through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with
principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances
are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the
specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance
for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and
industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied
to the loan groups to determine the amount of the general component of the allowance for loan losses.

Actual loan losses may
be significantly greater than the allowances we have established, which could have a material negative effect on our financial
results.

Deferred Income Taxes.
The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities:
(i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements
or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years
when those temporary differences are expected to be recovered or settled.

Deferred tax assets have
been reduced by a valuation allowance for all portions determined not likely to be realized. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance
is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

Comparison of Financial
Condition at September 30, 2016 and September 30, 2015

Total Assets. Total
assets increased $33.8 million, or 6.1%, during the twelve months ended September 30, 2016. The increase was attributable to a
$34.4 million increase in loans receivable, net of allowance of loss and higher interest bearing deposits with banks of $3.8 million,
partially offset by a $4.1 million decrease in other real estate owned.

Loans Receivable.
Total loans receivable, net of allowance for loan losses, increased $34.4 million, or 8.2%, to $455.0 million at September
30, 2016 from $420.6 million at September 30, 2015. At September 30, 2016, total loans receivable were comprised of $199.5 million
(43.6%) in commercial real estate loans, $173.2 million (37.8%) in 1-4 family residential mortgage loans, $38.9 million (8.5%)
in commercial business loans, $31.3 million (6.8%) in home equity lines of credit and other loans, and $14.9 million (3.3%) in
construction loans. Total loans receivable at September 30, 2015 were comprised of $173.9 million (41.0%) in commercial real estate
loans, $169.8 million (40.1%) in 1-4 family residential mortgage loans, $41.5 million (9.8%) in commercial business loans, $31.4
million (7.5%) in home equity lines of credit and other loans, and $6.7 million (1.6%) in construction loans.

Total non-performing loans
decreased by $1.7 million to $4.2 million during the year ended September 30, 2016 from $5.9 million at September 30, 2015. At
September 30, 2016, non-performing loans consisted of thirteen loans secured by 1-4 family residential mortgage properties totaling
$2.8 million, three commercial real estate loans totaling $443,000, and one commercial business loans totaling $997,000. The ratio
of non-performing loans to total loans was 0.9% at September 30, 2016 compared to 1.4% at September 30, 2015.

Once a loan is deemed non-performing,
the value of the collateral securing the loan must be assessed, which is typically done by obtaining an updated third-party appraisal.
To the extent that the current appraised value of collateral is

insufficient to cover a collateral-dependent loan, the Company
reduces the balance of the loan via a charge to the allowance for loan loss.

Non-performing loans secured
by one-to four-family residential properties, including home equity lines of credit and other consumer loans, increased $455,000
to $2.8 million at September 30, 2016 from $2.3 million at September 30, 2015. Magyar Bank had begun foreclosure proceedings on
the majority of the properties as of September 30, 2016. Foreclosure of owner-occupied residential properties in the State of New
Jersey can take several years. During the year ended September 30, 2016, Magyar Bank charged off $231,000 from these loans through
a reduction of its allowance for loan loss and recovered $82,000 from a prior year charge-off.

There were no non-performing
construction loans at September 30, 2016 and 2015. There were no charge-offs of non-performing construction loans while $7,000
was recovered from a prior year charge off during the year ended September 30, 2016.

Non-performing commercial
real estate loans decreased $1.5 million, or 76.6%, to $443,000 September 30, 2016 from $1.9 million at September 30, 2015. Magyar
Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2016. During the year ended September
30, 2016 Magyar Bank charged off $61,000 in non-performing commercial real estate loans through a reduction of its allowance for
loan loss and $100,000 was recovered from a prior year charge-off.

Non-performing commercial
business loans decreased $693,000 to $997,000 at September 30, 2016 from $1.7 million at September 30, 2015. During the year ended
September 30, 2016, Magyar Bank charged off $1.1 million in non-performing commercial business loans through a reduction of its
allowance for loan loss and $28,000 was recovered from a prior year charge-off.

The ratio of non-performing
loans and troubled debt restructurings to total loans receivable decreased to 0.92% at September 30, 2016 from 1.56% at September
30, 2015. The allowance for loan losses increased $170,000 to $3.1 million, or 72.6% of non-performing loans, at September
30, 2016 compared with $2.9 million, or 48.9% of non-performing loans, at September 30, 2015. Provisions for loan loss during
the year ended September 30, 2016 were $1.4 million while net charge-offs were $1.2 million, compared with a provision of $1.3
million and net charge-offs of $1.2 million for the prior year period. The allowance for loan losses was 0.67% and 0.68% of gross
loans outstanding at September 30, 2016 and 2015, respectively.

Investment Securities.
Investment securities decreased $510,000, or 0.9%, to $58.2 million at September 30, 2016 from $58.7 million at September 30, 2015.
Investment securities at September 30, 2016 consisted of $50.6 million in mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises, $4.0 million in U.S. government-sponsored enterprise debt securities, $3.0
million in corporate notes and $600,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment
charges for the Company’s investment securities for the year ended September 30, 2016.

Securities available-for-sale
decreased $830,000, or 13.7%, to $5.2 million at September 30, 2016 from $6.1 million at September 30, 2015. The decrease was the
result of $6.3 million in sales, $1.0 million in principal and premium amortization and $52,000 in unrealized gains, offset by
$6.5 million in purchases during the year.

Securities held-to-maturity
increased $320,000, or 0.6%, to $52.9 million at September 30, 2016 from $52.6 million at September 30, 2015. The increase was
the result of $10.6 million in security purchases, offset by $5.0 million matured and $5.2 million in principal and premium amortization
during the year.

Bank-Owned Life Insurance.
The cash surrender value of life insurance held for directors and executive officers of Magyar Bank increased $295,000, or 2.7%,
to $11.3 million at September 30, 2016 from $11.0 million at September 30, 2015. The increase in bank-owned life insurance was
due to the increase in the cash surrender value of the existing policies.

Other Real Estate
Owned. Other real estate owned decreased $4.1 million, or 25.4%, to $12.1 million at September 30, 2016 from $16.2 million
at September 30, 2015.

During the year ended September
30, 2016, the Company sold twenty properties totaling $4.8 million at a net loss of $101,000, invested $162,000 to complete or
repair properties, and obtained title for four properties totaling $1.8 million previously securing non-performing loans. In addition,
the carrying values of properties were reduced by $1.3 million from valuation allowances, sales deposits and one property totaling
$860,000 that was moved to buildings. OREO at September 30, 2016 consisted of eighteen residential properties (twelve of which
were leased), seven real estate properties approved

for the construction of residential homes, and five commercial real estate
buildings. The Bank is determining the proper course of action for its OREO, which may include holding the properties until the
real estate market improves, selling the properties to a developer or completing partially completed homes for either rental or
sale.

Deposits.
Total deposits increased $26.4 million, or 5.7%, to $492.7 million at September 30, 2016 from $466.3 million at September 30, 2015.

The Company’s deposit
strategy during the year ended September 30, 2016 was focused on increasing and expanding customer relationships with Magyar Bank,
including higher balance commercial deposit accounts. As a result of this strategy, the Bank was able to continue replacing higher-cost,
single service time deposit account holders with non-interest bearing checking and savings account balances.

The increase in deposits
during the twelve months ended September 30, 2016 occurred in money market account balances, which increased $10.9 million, or
10.5%, in savings account balances, which increased $10.5 million, or 11.7%, in non-interest checking account balances, which increased
$6.5 million, or 7.4%, and in interest-bearing checking account balances, which increased $7.6 million, or 18.3%. Partially offsetting
these increases was a $9.1 million, or 6.4%, decrease in certificates of deposit (including individual retirement accounts). Deposits
accounted for 84.3% of assets and 108.3% of net loans receivable at September 30, 2016.

At September 30, 2016,
the Company held $13.9 million in brokered certificates of deposit, reflecting a $2.5 million increase from September 30, 2015.

Borrowed Funds. Borrowings,
which include Federal Home Loan Bank of New York advances, increased $4.4 million, or 14.1%, to $36.0 million, or 6.2% of assets
at September 30, 2016 from $31.6 million at September 30, 2015. The Bank’s borrowings consisted of Federal Home Loan Bank
of New York advances at September 30, 2016.

Stockholders’
Equity. Stockholders’ equity increased $1.1 million, or 2.3%, to $47.7 million at September 30, 2016 from $46.6 million
at September 30, 2015. The increase in stockholders’ equity was attributable to the Company’s results of operations
for the year ended September 30, 2016.

The Company did not repurchase
any shares during the twelve months ended September 30, 2016. The Company has repurchased 81,000 shares pursuant to the second
stock repurchase plan through September 30, 2016, reducing outstanding shares to 5,820,746.

The Company’s book
value per share increased to $8.20 at September 30, 2016 from $8.02 at September 30, 2015. The increase was attributable to the
Company’s results from operations.

Comparison of Operating
Results for the Years Ended September 30, 2016 and 2015

Net Income. The
Company’s net income was $1.1 million for the year ended September 30, 2016, reflecting a $194,000, or 21.6%, increase from
$897,000 for the year ended September 30, 2015. The increase in net income between the twelve month periods was attributable to
higher net interest and dividend income, which increased $678,000, and non-interest income, which increased $155,000. Provisions
for loan loss for the twelve months ended September 30, 2016 increased $102,000 to $1.4 million, while non-interest expenses increased
$286,000 to $15.9 million.

The Company’s net
interest margin declined by 5 basis points to 3.32% for the quarter ended September 30, 2016 compared to 3.37% for the quarter
ended September 30, 2015. For the year ended September 30, 2016, the net interest margin declined by 8 basis points to 3.27% from
the prior year period. The Company has experienced lower yields on earning assets due to lower market interest rates while competition
for deposits resulted in an increase in the costs of funding.

Net Interest and
Dividend Income. Net interest and dividend income increased $678,000, or 4.2%, to $16.9 million during the year ended September
30, 2016 from $16.2 million during the year ended September 30, 2015. Total interest and dividend income increased $1.0 million,
or 5.2%, to $20.5 million for the year ended September 30, 2016 from $19.4 million for the year ended September 30, 2015 while
interest expense increased $336,000, or 10.5%, to $3.5 million for the year ended September 30, 2016 from $3.2 million for the
year ended September 30, 2015.

Average Balance Sheet.
The following table presents certain information regarding our financial condition and net interest income for the years
ended September 30, 2016, 2015 and 2014. The table presents the annualized average yield on interest-earning assets and the annualized
average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average
balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances
from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields.

For the Year Ended September 30,

2016

2015

2014

Average
Balance

Interest
Income/
Expense

Yield/Cost
(Annualized)

Average
Balance

Interest
Income/
Expense

Yield/Cost
(Annualized)

Average
Balance

Interest
Income/
Expense

Yield/Cost
(Annualized)

(Dollars In Thousands)

Interest-earning assets:

Interest-earning deposits

$

22,651

$

172

0.76%

$

11,432

$

84

0.74%

$

6,907

$

30

0.44%

Loans receivable, net

429,065

18,765

4.36%

412,718

17,987

4.36%

405,799

18,006

4.44%

Securities

Taxable

62,847

1,417

2.25%

58,343

1,283

2.20%

64,124

1,401

2.18%

Tax-exempt (1)

—

—

0.00%

—

—

0.00%

3

—

9.02%

FHLB of NY stock

2,159

97

4.46%

1,994

83

4.17%

2,278

93

4.08%

Total interest-earning assets

516,722

20,451

3.95%

484,487

19,437

4.01%

479,111

19,530

4.08%

Noninterest-earning assets

51,784

52,691

53,382

Total assets

$

568,506

$

537,178

$

532,493

Interest-bearing liabilities:

Savings accounts (2)

$

95,136

$

671

0.70%

$

80,782

$

505

0.63%

$

53,227

$

127

0.24%

NOW accounts (3)

153,575

489

0.32%

146,363

415

0.28%

145,549

346

0.24%

Time deposits (4)

138,253

1,628

1.17%

137,731

1,526

1.11%

154,150

1,948

1.26%

Total interest-bearing deposits

386,964

2,788

0.72%

364,876

2,446

0.67%

352,926

2,421

0.69%

Advances

34,507

744

2.15%

31,613

750

2.37%

38,859

1,039

2.67%

Total interest-bearing liabilities

421,471

3,532

0.84%

396,489

3,196

0.81%

391,785

3,460

0.88%

Noninterest-bearing liabilities

99,260

93,744

94,823

Total liabilities

520,731

490,233

486,608

Retained earnings

47,775

46,945

45,979

Total liabilities and retained earnings

$

568,506

$

537,178

$

532,587

Net interest and dividend income

$

16,919

$

16,241

$

16,070

Interest rate spread

3.11%

3.20%

3.20%

Net interest-earning assets

$

95,251

$

87,998

$

87,326

Net interest margin (5)

3.27%

3.35%

3.35%

Average interest-earning assets to

average interest-bearing liabilities

122.60%

122.19%

122.29%

(1) Calculated using 34% tax rate.

(2) Includes passbook savings, money market passbook and club accounts.

(3) Includes interest-bearing checking and money market accounts.

(4) Includes certificates of deposits and individual retirement accounts.

(5) Calculated as annualized net interest income divided by average total interest-earning assets.

Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The
rate column shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column
shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents
the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately, based on the changes due to rate and the changes due to volume.

September 30,

2016 vs. 2015

2015 vs. 2014

Increase (decrease)

Increase (decrease)

due to

due to

Volume

Rate

Net

Volume

Rate

Net

(Dollars in thousands)

Interest-earning assets:

Interest-earning deposits

$

86

$

2

$

88

$

26

$

28

$

54

Loans

778

0

778

306

(325

)

(19

)

Securities

Taxable

104

30

134

(130

)

12

(118

)

Tax-exempt (1)

—

—

—

(0

)

0

—

FHLB of NY stock

8

6

14

(12

)

2

(10

)

Total interest-earning assets

975

39

1,014

191

(284

)

(93

)

Interest-bearing liabilities:

Savings accounts (2)

102

64

166

91

287

378

NOW accounts (3)

19

55

74

2

67

69

Time deposits (4)

7

95

102

(199

)

(223

)

(422

)

Total interest-bearing deposits

128

214

342

(106

)

131

25

Borrowings

66

(72

)

(6

)

(180

)

(109

)

(289

)

Total interest-bearing liabilities

194

142

336

(286

)

22

(264

)

Increase (decrease) in tax equivalent

net interest income

$

781

$

(103

)

678

$

477

$

(306

)

171

Increase in net interest income

$

678

$

171

(1) Calculated
using 34% tax rate.

(2) Includes
passbook savings, money market passbook and club accounts.

(3) Includes
interest-bearing checking and money market accounts.

(4) Includes
certificates of deposits and individual retirement accounts.

Interest and Dividend
Income. Interest and dividend income increased $1.1 million, or 5.2%, to $20.5 million for the year ended September 30,
2016 from $19.4 million for the year ended September 30, 2015. The average balance of interest-earnings assets between the two
periods increased $32.2 million, or 6.7%, to $516.7 million from $484.5 million, while the yield on the assets fell 6 basis points
to 3.95% for the year ended September 30, 2016 from 4.01% for the same period prior year.

Interest income on loans
increased $778,000, or 4.3%, to $18.8 million for the year ended September 30, 2016, while the average balance of loans increased
$16.3 million, or 4.0%, to $429.1 million from $412.7 million. The average yield on such loans was 4.36% at September 30, 2016
and 2015. The increase in yield on loans reflected a $16.3 million increase in the average balance in loan receivables during the
year ended September 30, 2016.

Interest earned on investment
securities, excluding Federal Home Loan Bank of New York stock, increased $222,000, or 16.2%, to $1.6 million for the year ended
September 30, 2016 from $1.4 million for the prior year. The increase was primarily due to a $15.7 million, or 22.5% increase in
the average balance of investment securities and interest earning deposits to $85.5 million from $69.8 million from the prior year,
and a 10 basis point decrease in the average yield on securities to 1.86% from 1.96%. The decline in the yield on investment securities
and the interest earning deposits reflected higher interest balances of interest-earning deposits, which earn lower yields.

Interest Expense.
Interest expense increased $336,000, or 10.5%, to $3.5 million for the year ended September 30, 2016 from $3.2 million
for the year ended September 30, 2015. The average balance of interest-bearing liabilities

increased $25.0 million, or 6.3%, to
$421.5 million from $396.5 million between the two periods while the cost of such liabilities increased 3 basis points to 0.84%
for the year ended September 30, 2016 from 0.81% for the same period prior year.

The average balance of
interest-bearing deposits increased $22.1 million, or 6.1%, to $387.0 million for the year ended September 30, 2016 from $364.9
million for the prior year while the average cost of such deposits increased 5 basis points to 0.72% from 0.67%. Interest expense
on average deposits increased $342,000, or 14.0%, to $2.8 million for the year ended September 30, 2016.

Interest expense on advances
decreased $6,000, or 0.8%, to $744,000 for the year ended September 30, 2016 from $750,000 for the year ended September 30, 2015.
The average cost of borrowings decreased 22 basis points to 2.15% for the year ended September 30, 2016 from 2.37% for the year
ended September 30, 2015. The average balance of advances and securities sold under agreements to repurchase increased $2.9 million
to $34.5 million for the year ended September 30, 2016 from $31.6 million for the year ended September 30, 2015.

Provision for Loan
Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and
inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level
of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in
the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information becomes available or as future events occur.

After an evaluation of
these factors, management made a provision of $1.4 million for the year ended September 30, 2016 compared with a $1.3 million provision
for the prior year. The increase in provisions was attributable to growth in net loans receivable. There were net charge-offs of
$1.2 million for both years ended September 30, 2016 and 2015. The charge-offs resulted from updated valuations of collateral securing
impaired loans.

Total non-performing and
performing restructured loans decreased $2.4 million, or 36.4%, to $4.2 million at September 30, 2016 from $6.6 million at September
30, 2015. Excluding troubled debt restructurings, non-performing loans decreased $1.7 million, or 28.7%, to $4.2 million from $5.9
million. The allowance for loan losses increased $170,000 to $3.1 million, or 0.67% of gross loans outstanding at September 30,
2016, from $2.9 million, or 0.68% of gross loans outstanding at September 30, 2015. The increase in the allowance for loan losses
during the year ended September 30, 2016 was attributable to provisions for loan loss of $1.4 million, recoveries totaling $215,000
and growth in total loans receivable, offset by charge-offs totaling $1.4 million.

Other Income. Other
income increased $155,000, or 7.8%, to $2.1 million during the year ended September 30, 2016 compared to $2.0 million for the year
ended September 30, 2015. Other income increased from higher gains on sales of assets, which were $697,000 for the twelve months
ended September 30, 2016 compared with $584,000 for the twelve months ended September 30, 2015.

The Company’s gains
on sales of loans increased $83,000, or 15.3%, to $625,000 for the year ended September 30, 2016 from $542,000 for the year ended
September 30, 2015. The Company’s gains from the sales of investment securities increased $30,000, or 71.4%, to $72,000 for
the year ended September 30, 2016 from $42,000 for the year ended September 30, 2015.

Other Expenses. Other
expenses increased $286,000, or 1.8%, to $15.9 million for the year ended September 30, 2016 compared to $15.7 million for the
year ended September 30, 2015 due to higher compensation and other real estate owned expenses. Compensation and benefit expenses
increased $342,000, or 4.2%, to $8.5 million due to annual merit increases, higher incentive plan accruals, and higher pension
expense than the prior year period. Other real estate owned expenses increased $323,000, or 72.3%, to $770,000 due to $301,000
in valuation allowances recorded during the year on properties that were re-appraised at lower values.

Partially offsetting the
increases were decreases in occupancy and other expenses. Occupancy expenses decreased $107,000, or 3.8%, to $2.7 million for the
year ended September 30, 2016 from $2.8 million for the year ended September 30, 2015. The decline was due to lower depreciation
and snowplowing expenses incurred during the current year period. Other expenses decreased $114,000 during the twelve months ended
September 30, 2016 due to the settlement of a lawsuit with the Company’s former President & CEO that resulted in a net
charge of $135,000 in the prior year period.

The Company also experienced
lower professional fees and loan servicing expenses. Professional fees decreased $85,000, or 8.0%, to $984,000 during the year
ended September 30, 2016 from $1.1 million for the year ended September 30, 2015. Loan servicing expenses decreased $56,000, or
20.3%, to $220,000 during the twelve months ended September 30, 2016 from $276,000 for the twelve months ended September 30, 2015
due to lower non-performing loan expenses.

Income Tax Expense.
The Company recorded tax expense of $664,000 for the year ended September 30, 2016 compared with tax expense of $413,000 for the
year ended September 30, 2015. The increase in income tax expense was due to a $194,000 increase in net income and $60,000 increase
in the valuation allowance against the Company’s deferred tax asset for the non-qualified stock options due to expire in
fiscal year 2017. The Company’s effective tax rates were 37.8% and 31.5% for the years ended September 30, 2016 and 2015,
respectively.

Management of Market Risk

General.
The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest
rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily
of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of
our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability
Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining
the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives,
and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level
of interest rate risk on a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our
asset/liability policies and interest rate risk position.

We have sought to
manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part
of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio
fewer fixed rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial
real estate loan portfolios, by using alternative funding sources, such as advances from the Federal Home Loan Bank of New York
(“FHLBNY”), to “match fund” longer-term residential and commercial mortgage loans, and by originating and
retaining variable rate home equity and short-term and medium-term fixed-rate commercial business loans. We have also increased
money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market
indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.

Net Interest Income
Analysis. The table below sets forth, as of September 30, 2016, the estimated changes in our Net Interest Income (“NII”)
for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require
making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities
and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes
in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest
rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest
rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the
manner in which actual yields and costs respond to changes in market interest rates.

Change in

Estimated Decrease

Estimated Increase

Interest rates

Estimated

in NII Year 1

Estimated

(Decrease) in NII Year 2

(Basis Points)(1)

NII Year 1

Amount

Percentage

NII Year 2

Amount

Percentage

(Dollars in thousands)

+200

$

17,081

$

(365

)

-2.09%

$

17,734

$

576

3.36%

Unchanged

17,446

—

—

17,158

—

—

-100

16,545

(901

)

-5.16%

15,673

(1,485

)

-8.65%

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

Liquidity is the
ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit
inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity
targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as
well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is
calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term
liabilities (estimated 30-day deposit outflows), borrowing capacity from the FHLBNY, and brokered deposit capacity and dividing
the sum by total assets. At September 30, 2016, our liquidity ratio was 9.2% of assets.

Our most liquid
assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing
activities during any given period. At September 30, 2016, cash and cash equivalents totaled $21.8 million. Securities classified
as available-for-sale, which provide additional sources of liquidity from sales, totaled $5.2 million at September 30, 2016.
At September 30, 2016, we also had the ability to borrow $95.1 million from the FHLBNY. On that date, we had an aggregate
of $36.0 million in advances outstanding.

At September 30,
2016, we had $12.0 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $45.9
million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2017 totaled $56.5
million, or 11.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds,
including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher
rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement
accounts and brokered certificate deposit accounts) due on or before September 30, 2017. We believe, however, that based on past
experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate
deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing
activities are the origination of loans and the purchase of securities. We originated $92.7 and $75.6 million of loans and
purchased $17.1 million and $9.7 million of investment securities for the years ended September 30, 2016 and 2015, respectively.

Financing activities
consist primarily of activity in deposit accounts and FHBNY advances. We experienced a net increase in total deposits of $26.4
million for the year ended September 30, 2016 and a net increase in total deposits of $17.8 million for the year ended September
30, 2015. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and
our local competitors and other factors.

Liquidity management
is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $36.0 million
and $31.6 million at September 30, 2016 and September 30, 2015, respectively. FHLBNY advances have primarily been used to fund
loan demand.

Magyar Bank is subject
to various regulatory capital requirements, including a commitment to maintain capital at or above the well capitalized level (see
“Supervision and Regulation-Federal Banking Regulation-Capital Requirements”). As of September 30, 2016, Magyar Bank’s
Tier 1 capital as a percentage of the Bank's average assets was 8.27% and the total qualifying capital as a percentage of risk-weighted
assets was 12.19%.

Bank-owned life insurance
is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors
and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies
and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers
that are highly rated and limiting the

concentration of any one carrier. The investment in bank-owned life insurance has no significant
impact on our capital and liquidity.

Off-Balance Sheet Arrangements
and Aggregate Contractual Obligations

Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such
as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent
our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments
are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note
P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our Financial Statements.

Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases
for premises and equipment.

The following table summarizes
our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2016. The
payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other
similar carrying amount adjustments.

We have audited the accompanying
consolidated balance sheets of Magyar Bancorp, Inc. and subsidiary (the “Company”) as of September 30, 2016 and 2015,
and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows
for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September
30, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

On January 23,
2006, Magyar Bank (the “Bank”) completed a reorganization involving a series of transactions by which Bank’s
corporate structure was changed from a mutual savings bank to the mutual holding company form of ownership. Magyar Bank became
a New Jersey-chartered stock savings bank subsidiary of Magyar Bancorp, Inc., a Delaware-chartered mid-tier stock holding company.
Magyar Bancorp, Inc. (the “Company”) owns 100% of the outstanding shares of common stock of Magyar Bank. Magyar Bancorp,
Inc. is a majority-owned subsidiary of Magyar Bancorp, MHC, a New Jersey-chartered mutual holding company.

Magyar Bancorp,
MHC, owns 54.0%, or 3,200,450, of the issued shares of common stock of Magyar Bancorp, Inc. Of the remaining shares, 2,620,296,
or 44.2%, are held by public stockholders and 102,996, or 1.8%, are held by Magyar Bancorp, Inc. in treasury stock. So long as
Magyar Bancorp, MHC exists, it will be required to own a majority of the voting stock of Magyar Bancorp, Inc. Magyar Bancorp, Inc.
and Magyar Bancorp, MHC are subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve
System and the New Jersey Department of Banking and Insurance.

The Bank is subject
to regulations issued by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation (the
“FDIC”). The Bank’s administrative office is located in New Brunswick, New Jersey. The Bank has six branch offices
which are located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey. The Bank’s
savings deposits are insured by the FDIC through the Deposit Insurance Fund (DIF); also, the Bank is a member of the Federal Home
Loan Bank of New York.

MagBank Investment
Company, a New Jersey investment corporation subsidiary of the Bank, was formed on August 15, 2006 for the purpose of buying,
selling and holding investment securities.

Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established
in 2002 as a qualified intermediary operating for the purpose of acquiring and developing the Bank’s new main office. The
Bank owns a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning the Bank’s main
office site.

Magyar Service
Corporation, a New Jersey corporation, is a wholly owned, non-bank subsidiary of the Bank. Magyar Service Corporation, which also
operates under the name Magyar Financial Services, receives commissions from annuity and life insurance sales referred to a licensed,
non-bank financial planner.

The Bank competes
with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations,
credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such
institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to
one or more of the services it renders.

The Bank is subject
to regulations of certain state and federal agencies and, accordingly, the Bank is periodically examined by such regulatory authorities.
As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future
state and federal legislation and regulations.

NOTE B - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

1. Basis of
Financial Statement Presentation

The accounting
and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP)
and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, the Bank, and its wholly-owned subsidiaries MagBank Investment Company, Magyar Service Corporation,
and Hungaria Urban Renewal, LLC. All intercompany balances and transactions have been eliminated in the consolidated financial
statements.

The Company has
evaluated subsequent events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2016,
for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted
through the date these consolidated financial statements were issued.

In preparing
financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The principal
estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and
the deferred tax asset. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual
loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic
and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral
values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses.

The Company records
income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for
the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences
are expected to be recovered or settled.

Where applicable,
deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation
allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

2. Cash and
Cash Equivalents

For purposes
of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, time deposits with original maturities
less than three months and overnight deposits.

3. Investment
Securities

The Company classifies
its investment securities into one of three portfolios: held to maturity, available for sale or trading. Investments in debt securities
that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported
at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings.
Debt and equity securities not classified as either trading securities or as held to maturity securities are classified as available
for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported
in the accumulated other comprehensive income (“AOCI”) component of stockholders’ equity.

If the fair value
of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with
unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary”
in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification
as either available for sale, held to maturity or trading. Temporary impairments on “available for sale” securities
are recognized, on a tax-effected basis, through AOCI with offsetting entries adjusting the carrying value of the security and
the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held to maturity” securities
for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities
is generally disclosed in periodic consolidated financial statements. The carrying value of securities held in a trading portfolio
is adjusted to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading portfolios
at or during the periods presented in these consolidated financial statements.

The Company accounts
for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that
the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to
the full recovery of the their fair value to a level equal to or exceeding their amortized cost, are recognized in operations.
If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related
components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are
expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related
component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes
credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt
securities are recognized, net of deferred taxes, in AOCI.

Federal law
requires a member institution of the Federal Home Loan Bank (“FHLB”) system to purchase and hold restricted stock of
its district FHLB according to a predetermined formula. This stock is restricted in that it may only be sold to the FHLB and all
sales must be at par. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges.

Premiums and discounts
on all securities are amortized or accreted to maturity by use of the level-yield method considering the impact of principal amortization
and prepayments on mortgage-backed securities. Gain or loss on sales of securities is recognized on the specific identification
method.